Wednesday, 24 September 2008

Todays big story is that Ben Bernanke and Hank Paulson are trying to get a $700bn blank cheque from congress in order to bailout their criminal friends on Wall Street. Understandably, this isn't going down too well with the american taxpayer. It's a lot of money to be paying the interest off on for the rest of eternity.

It's a lot of money to put your own children and grandchildren into debt for. Many commentators are outraged at the proposal, senators are huffing and puffing about it, the blogosphere has gone purple with rage, Mr. Denniger the ticker guy has put his best suit on, other bloggers have caught trains to DC to go and protest in person. The outlook is uniformly negative from almost all sections of the population that aren't bankers.

So - likely outcomes from all this -

1) They get the money and dictatorial powers. The senators will get bribed. The media will get distracted by some other event. The ardent protestors will get told to DIAF. People will be very, very cross indeed....but what are they going to do?

This means hyperinflation - how do you make money in hyperinflation? Well you don't, you aim to lose less than everyone else. What you do is hold non taxable assets until it's all over and then liquidate them and reinvest. It will also mean hyperinflation pretty much everywhere on earth because the dollar is the worlds reserve currency.

2) They don't get all the money and they don't get all the dictatorial powers or the senators add some dictatorial powers of their own to the proposal. Some minor aspect of the bailout plan is allowed by congress - they cycle "only" a few hundred billion dollars at a time, Hank Paulson gets only partial immunity and some scant oversight of his actions is done.

Same as 1), really but will take longer, because the powers once granted in a limited fashion will expand quite quickly by degrees.

3) They don't get the powers and bailout money. I hadn't actually considered this as all that likely until doing this list. What this means is that they will be asking for the powers again in a few days time and so on until they get them. As the crisis deepens, the lack of alternatives offered will mean that the powers will probably be granted out of panic.

If they never get them, then the banks will fail, including the Fed. Again this means assets you can hold onto and waiting for calmer times.

4) Incredibly unliklely imo - the outraged taxpayer gets a day in the sun. The proposal is rejected, the banks are made to confess all, bad banks go to the wall, there are no insider bailouts, the senators do the decent thing, the legal tender law is repealed, fractional banking is put back on the law books as fraud.....the good guys win.

Banking system implodes. And same again - assets you can hold onto until the world makes sense again.

5) Something really random happens, like an amazing new technology is invented that reduces the need for money or aliens invade...a black swan. With a black swan...who knows?

What's going to happen in all circumstances bar the black swan?

STATE FAILURE

Hyperinflationary, deflationary..banks survive, banks go under...central banks survive, central banks go under..all roads lead to a state failure. Not that the state will completely vanish, but what it will do is shrink to a fraction of it's current size. It needs to steal to live and it lives to order people to obey it's whims.....and currently it steals and gives orders at very low cost via the banking/inflation paradigm.

Remove that and it will have to go back to robbing people in person - higher risk, more cost, lower reward. This means a much smaller but more vicious government, less regulation, less control..the seeds for the next boom in fact!

Personally I think hyperinflation is the preferred method - the plans are all in place for a highly militarised rump state (Patriot act, civil contingencies act) that can protect the wealthy from the poor and hyperinflation will wipe out a lot of systemic debts like entitlement programs, pensions, healthcare promises, foreign debts......in fact I am convinced the whole thing has been planned that way.

'Course none of my stuff is investment advice, nor can I see into the future. I just extrapolate from past behaviour and can do basic math.

Sunday, 21 September 2008

Two suspects are arrested by the police. The police have insufficient evidence for a conviction, and, having separated both prisoners, visit each of them to offer the same deal. If one testifies ("defects") for the prosecution against the other and the other remains silent, the betrayer goes free and the silent accomplice receives the full 10-year sentence. If both remain silent, both prisoners are sentenced to only six months in jail for a minor charge. If each betrays the other, each receives a five-year sentence. Each prisoner must choose to betray the other or to remain silent. Each one is assured that the other would not know about the betrayal before the end of the investigation. How should the prisoners act?

Rationally, each person should act to betray.

What has this to do with borrowing and lending?

Simply this - if you borrow you can purchase assets and then charge those who couldn't afford to buy the asset the interest via higher prices. It's rational therefore, to borrow when it is offered to buy assets. It's also rational to lend to people so they can buy assets up until the point where borrowings equal the sale value of the asset - one interest payment and a resale and a profit has been made.

A situation to consider -

John and Bob are both going to buy the same business, for example a water treatment plant. John has £10,000 in savings. Bob has £9,000 in savings. Other things being equal, John will purchase the water treatment plant over Bob because he can pay more for it. Let's introduce the banker, Jim.

Jim can lend both John and Bob money, he doesn't mind which one it is at all. If he loans Bob the money then Bob can buy the asset over John. What will almost certainly happen is that John will have to borrow an amount over and above his savings sufficient to keep Bob at bay. So if the bank was willing to lend £4,000 to Bob, then John will have to borrow £3,001 in order to acquire the asset. Consequently, the price of water treatment will have to go up to pay the loan off. (Or the water treatment business will fail because of the interest payments when otherwise it would have been fine.)

It's pretty obvious, therefore, that loaning inflates asset prices, it 's also obvious that the existence of someone making loans forces people to either borrow or lose the chance of ownership of assets and then spend their savings and wages on higher prices. While this might not be true for very flexible discretionary purchases, it's going to be a sliding scale according to the elasticity of demand for the asset in question, or the legislated inabilty to provide alternatives.

It's worth also pointing out that borrowing will increase until the level where it's as close as possible to 100% of asset value and interest payments are equal to 100% of earnings as everyone tries to borrow in a desperate attempt to own something before the next guy turns you into his serf via this debt mechanism. Once it's maxed out, then the whole system wll unravel because interest payments can no longer be made and all savings have vanished. under a fractional system this might take decades but is inevitable.

Once we have lending there are now two choices - borrow or pay higher prices to those who have. It's a prisoners dilemma and one in which the risky option is the right option to go for as an individual. This will increase systemic risks as "risk takers" prosper, putting "risk takers" in the decision making roles of society and the conservative non risk takers will get punished.

You can choose to be either smug or damned. You can choose to take risks on flaky business proposals or you can work in the factory or office of someone who has taken on stupid risks for ever diminishing wages while your efforts go towards paying their interest payments. You can choose to have a hefty mortgage or you can choose to pay someone elses hefty mortgage via rent.

Until it all collapses of course, at which point super-conservative behaviour will become the overwhelming force , those with gold, guns and a bunker full of beans will prosper. But, as has been said many times elsewhere - the market can stay irrational longer than you can stay solvent.

Still think that no one is forced to borrow?

Well, you are right. You are still going to pay the lender though, one way or another.

Thursday, 18 September 2008

What a week. There is almost too much news to go through, but with a herculean effort I might just make it.

Which is why I am not going to bother. Rounding up the latest and greatest financial news is done elsewhere by people a lot more competent than I am. Why am I telling you this?

Mostly because I got an email asking me why I don't cover the day to day stuff.

It does however throw some questions up about what's going on right now. Remember what I said about cartels?

They don't last very long. There is just too much profit to be made by fleecing the weaker members or merely badly placed members of the cartel for any cartel to last for very long. There are some things all members can agree on, however - namely the integrity of the system which feeds and houses them so lavishly continuing. As there is much to be made from being in a cartel, they keep forming and breaking in a natural cycle.

Let's change tack totally at this point and have a look at some of the confidence tricks the last week threw at us.

First of all - Lehman Brothers "bankrupcy." You'd think that in this case some bills didn't get paid, wouldn't you?

Nope. Never happened - the debts were handed over to someone else and a bailout occured. You might have missed that from bubblevision, you will have certainly missed it from the nightly news. Pictures of employees loading cars up, disgruntled workers filing out of the offices etc etc This is a banker special, a wrong foot move. This is one set of cartel members (probably unpopular) getting chucked out. The FED actually backstopped the whole thing anyway - but the employees got fired.

Expect to see more of these mergers and acquisitions as the "chosen ones" get their place at the table and everyone else gets various forms of treatment from not being paid at the end of the month to being handsomely golden handshaked. Most interesting in this regard is the news that goldman sachs (or the US treasury as it should be known) looks under pressure.

Everyone is going into the hopper, lets see who is the right shape to fall out of the hole.

Next up let's talk about AIG. A massive insurance company, with a licence to print money via coercive insurance on everything that moves from the legislative class...they still mucked it up. Apparently. When it failed, the government reluctantly...and after some brinksmanship took control of it.

Brilliantly, they got around various forms of legislation and contracts related to other things by calling it "conservatorship" and not a nationalisation or default. Conservatorship is usually done with mental incompetents when their legal affairs need to be looked after.

This was the plan all along.

Problem, reaction, solution.

Problem - worlds largest insurer can't find small pieces of paper to give to other people.

Reaction - Oh no! It's going to not be able to insure the banks/orphanage/nuns' hospital.

Solution - Government reluctantly takes it under it's wing.

All bollocks of course. This financial crisis is all about profit taking and control via the mechanism of debt and seizure.

The general trend is still there - bankrupt as many people as possible by denying them credit and then seize as many of their assets as possible with hyperinflation later on.

People who think they have lost out due to their own fault do not fight, they do not resist. People who think their fellow men are poor because they had bad judgement or were greedy do not band together, they shun each other.

Underlying all this of course, is the actual economics - the partial rump of free market activity that makes the rest of it all hang together. The financial sector has been stealing too much and they have gotten too fat, are expecting even bigger meals in the future and this is dangerous for all.

Thursday, 11 September 2008

Politically, I am a voluntaryist, I think that as many human interactions as possible should be voluntary. This means that anyone has the right to say no to anything that is put to them, for any reason or none.

It's not that simple of course, but then very few things are.

Anyhoo, I want to post about one of the more genius aspects of the government and it's propaganda, which is the idea that the government is incompetent and useless. One of the standard rebuttals of conspiracy theories or the idea that a handful of people can control millions and billions of others is that everything the government does is crap.

And it is. Seen from one angle, through one lens.

The government and the people who work for it are bloody awful at providing roads, hospitals and schools. There is no start to their talents when it comes to providing goods and services that anyone would find more than passable and want to buy voluntarily. Pretty much everything they touch turns rotten the moment they grasp it.

I believe the classic phrase is "They couldn't organise a piss up in a brewery."

But..hang on....

If the government is so terrible at everything, how come it controls so much?

And heres the thing. The government is very, very good at taking control of things. The clue should be in the name, but it slips by a lot of people. Governments control. They take over. They dominate. They infest, they creep, they play long term games to acquire more power. In this, all sectors of the government are united - control is good and more control is better.

Seen through this lens - that everything the government does it does to either maintain or gain more power then every crisis makes a lot more sense. It doesn't really matter whether the crisis is real (Hurricane Katrina) or the crisis is fake (credit crunch) the government will swiftly act to use the opportunity to their advantage. New taxes, new laws, new quangos, new regulations, new jobs for the boys.....this is what a crisis means to a government.

What does this mean? What can you do with this knowledge?

Very simply, you can make money from it. Predicting the future in a free market is difficult, old products die, new ones are born all the time Todays hot trend is next years hula hoop.

Predicting what the government will do is pointlessly, mindlessly, shooting-fish-in-a-barrel easy. Lets say you see a story about some new technology - an RFID chip, one which will track a human being anywhere and everywhere they will go. Your stomach heaves at the potential loss of your liberty, your mind recoils at the intrusion. As soon as you see something which has such upside for a government in controlling you then it should be obvious that it being brought in is inevitable, no matter the cost, the waves of protest, the opposition to it......inevitable.

Buying shares in such things is what I sometimes do. You may as well be paid for wearing chains as not.

Look at them again.

See them through the lens of a controlling eye. It's a horrible question to consider but ask yourself, "If I was a power mad loon with delusions of grandeur and a desire to make everyone else my personal slave, what would I do right now?"

Ask this question and you can predict a good 80% of what the government will get up to.

It also means that apparent failures of government policy are revealed as anything but. When you see George Bush handing out stimulus checks to a bedraggled american consumer and all the serious economists are going, "Can't possibly work, the guy is an idiot!" then put on the lens I just suggested.

When you hear that fannie and freddie are going broke and that a government bailout will cost trillions, debauch the currency, drown the consumer in taxes and debts..only ask - "Does the government get more control by bailing them out, or less?"

If it's less, then they won't lift a finger. If it's more, then they will move heaven and earth. This is the governments criteria for acting. This is how they respond to events.

Thanks for reading. Next time I'll be using this idea with some news stories and making some predictions, we can test the idea out in real time.

Monday, 8 September 2008

"Yes, gold does have an objective value. It is equal to or nearly equal to the labor required to find it, extract it, smelt it, mint it, transport it and trade it. Correct me if I am wrong. I apprerciate this blog. Roark."

(Thanks for the kind words Roark.)

The idea that values are objective comes naturally, I think, to us as humans. It's an emotional thing like a phobia or an obsessive love. We can point out the rational and obvious truth...that other people do not share our exact values in more or less anything but it never seems to immediately chime with people.

That's my experience anyway. It should be very, very obvious that there are no objective values. Look around. If values were objective, then everyone would eat the same food, they would drink the same drinks, they would wear the same clothes...hmm this is all a bit Chairman Mao, isn't it? (and that's no accident, a belief in objective values inevitably requires everyone behave the same way. After all, if there is an objective set of values for everyone all we have to do is find them and act on them and we have nirvana.)

Each one of us has completely different values to anyone else. You say potaytoh, I say pohtahto. You like strawberry ice cream, I don't. I like chocolate ice cream, you like cabbage. And so on. Who is right?

We both are.

However, having said this, it is worth remembering that people are pretty similar animals as well. While each of us has completely different values, our relative biological similarity will mean that some but not all of our values overlap. In a desert, we will almost all drink muddy water if it's the only thing going. (Yet more Chairman Mao comes to mind.) Some of us might not drink muddy water even then, being in the desert for religious, suicidal or other reasons but it's a fair assumption to say that these people will be vanishingly small in number.

So while values are subjective, there will be enough crossover to fool the casual observer that values are objective, at least in part. Add in the nature of people to copy habits from each other culturally and socially and the illusion is complete.

Returning to Roarks point about gold.........What is gold worth? And the answer to that question is another question...who to?To me it's not worth so much. It's pretty boring and not all that tasty. To someone like CGNAO* or Auric Goldfinger it's like a wet dream, the best thing ever....a god amongst objects.

This has an implication when it comes time to trade that gold. If you are offering it to me, I am not going to give you much in exchange for it. If you offer it to someone else you might get more or less for it than I offer. I think this is proof that values are subjective, beyond all doubt.

The amount of labour doesn't really matter, only the individual valuation of those who are in the market for the gold. (Coupled with their ability to give something in trade, of course.)

This has a fantastic implication for peoples interactions. If I offer Roark 1 kilo of silver in exchange for his 50 grams of gold and we agree on the trade we have both walked away better off in our own estimation than before we met and traded. (And if we are ignorant of subjective values we will probably both be thinking that the other guy is a fool.)

Saturday, 6 September 2008

A promissory note is a type of contract that agrees to provide an item in the future (gold, wheat, a picture of Britney Spears naked etc) in exchange for something right now. So, for example, a promissory note would be accepted in exchange for doing a days work and later on the labourer would come and exchange the promissory note for the item he had been promised.

At the start of bankings meteoric rise to economic dominance, people would place their gold in the bank, and the banker would issue a promissory note against that gold which the depositor could redeem at any time. This was an "on demand" claim form for his gold. Eventually people started to exchange the promissory notes amongst themselves as though they were the actual gold itself.

Eventually, the banker noticed he could make more promissory notes than gold he held, but this didn't matter as long as people didn't all come for their gold at once. This story usually ended in ruin for the banker as the inevitable happened, everyone turned up at once and his fraud was discovered......the bank run, the fear of all bankers.

The last time the bankers did this and were discovered, something else happened, instead of the bankers ruin. Allied with the government, the bankers both refused (or were unable to honour) their promises and managed to stay in operation. Laws were passed outlawing the holding of gold, the paper money was fixed by law at certain levels and prices for goods and the promises were said to be as good as gold in and of themselves.

In short, we went onto a promissory note standard. Money these days is an unbacked promise, an empty note. Nothing can be bought with it, only debts can be dismissed as far as a court is concerned using legal tender.

Fascinating, but what does this mean?

It means that promises are money. When you go and "borrow" from a bank, you sign a promissory note, which the bank records as valuable in and of itself. Then you are paid for your asset in an equal amount of bank credit. if you were to borrow £10,000 or $10,000 then you will first give the banker a promise worth £10,000 and then be handed back those promises in an equal amount.

The value for this money comes from the holders of all other holders of the currency you have just created more of. It does not come from the bankers. It does not come from deposits. The money is created by the borrowers signature.

To "borrow" £10,000 from a bank these days means that you give them an asset worth £10,000 and then they pay you for it. The total amount of money the bank has goes up when you sign the form and then back down when you are given your payment.

That's right folks, you funded your own loans.

As much as the banker would like you to think that he would be out of pocket or his depositors would be out of pocket if you do not "repay" him, this is a myth. His books were balanced the moment you took the money back from him and nothing further need happen. it might have said "loan form" on the top of the piece of paper you signed but I have a friend who called his cat "doggy" and it's still not barked. I don't think it ever will do, either. (Small aside, mortgage means grip of death in french. French people rent more than most other nations..perhaps this explains why. )

Of course, the banker only did this because he figured you don't know how the system works and you will be a good little boy or girl and run around working hard to "repay" your debts to him, at which point he gets to keep the money for himself. Or you might try hard and fail, in which case he can take you to court and seize your assets for himself.

So..erm...if this is the case how come banks can go out of business?

If bankers and customers and everyone else can make promises and promises are money, then it doesn't seem to make much sense that they can go out of business. Anyone can promise anything, in unlimited amounts. We are all good for it, honest! The trouble the bankers (and everyone else for that matter) have is that no one has to accept their promises. The law only requires that people accept legal tender, the central banks promissory notes if offered as settlement.

When a bank runs out of people willing to accept it's own promises in payment and it runs out of legal tender, then it will go bust. The central bank can and sometimes does turn the franchise banks promises into legal tender, but this is inflationary and harms the overall integrity of the system so isn't usually done. It's normally better to collapse the bank in an orderly fashion, tell the depositors they aren't going to be getting all their money (not that it matters, they are only going to be putting it in another franchise bank anyway) back and keep the people who think they are in debt working away.

Whatdoes this mean if you have a "debt"?

You don't have a debt. You owe nothing. In fact, if you made any repayments, the banks owe you. Good luck getting them to pay you back though.

What does this mean if you are a depositor?

Nothing. Your deposit is fine. It just probably wasn't made in legal tender like you thought it was and was just someone elses bankers promises.

What does this mean if you are a banker?

Life on easy street until people wake up or you cut your own throat through greed.

This does leave some options for those who are in debt and being chased by the bankers, which I will be covering in future.